Alternatives to measuring portfolio performance

Tired of using the S&P 500 as a benchmark against which to measure your portfolio? There are some new options (free WSJ Digg link).

And as investors add more complex assets such as real estate and commodities to their traditional holdings of stocks and bonds, the S&P 500 and other well-known indexes have become even less reliable indicators of whether you're getting a reasonable return from your portfolio given the level of risk you're taking on.

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An appropriate benchmark also can show whether any fee you're paying for investment management is money well spent. Without good benchmarks, "you're flying blind," says Bud Green, a principal at Santa Monica, Calif.-based Fortress Wealth Management.

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The next step is to build a custom benchmark by assembling a list of index mutual funds and exchange-traded funds that track the asset classes represented in your portfolio. To find out which funds track which asset classes, investors can use the data tool at indexuniverse.com or the mutual fund and ETF screeners at Morningstar.com. A boom in ETFs means these funds now track virtually every slice of the market, including high-yield bonds, real estate and emerging market stocks.

Finally, investors can use free portfolio-tracking tools available at sites like finance.yahoo.com or Morningstar.com to assemble and track their custom benchmark, along with their actual portfolio. If, for instance, your portfolio is 50% U.S. stocks, 20% foreign stocks, 15% short-term Treasury bonds, 10% real estate, and 5% commodities, you might create a custom benchmark consisting of 50% Vanguard Total Stock Market Index fund, 20% Vanguard FTSE All-World ex-US Index fund, 15% iShares Lehman Short Treasury Bond ETF, 10% DJ Wilshire REIT ETF and 5% PowerShares DB Commodity Index Tracking ETF.

I'm fine with just using the S&P 500 as a benchmark, or the Wilshire 5000. I'll look at the Morgan Stanley EAFE index to measure my foreign mutual fund performance against. I dabbled in creating a custom benchmark as the article laid out, but boy is it time consuming. This could be an opportunity for Yahoo! Finance to add some slick custom benchmarking tools.